Fixed Rate Versus Variable Rate - How to Decide?
Over the past twelve months, the COVID-19 pandemic has affected the Canadian economy significantly, which has had a knock-on effect on the mortgage industry.
Consequently, current bond yields are making homeowners think carefully about whether they should opt for a fixed rate or variable rate mortgage. Read on to learn more.
Bond Yields Update: We are holding steady around 0.9% on the Government of Canada 5 year Bond yields and 1.17% on the CMB bond. Besides, short-term rates are still low, keeping variable interest rates competitive.
Variable Pricing: With 5 Year Fixed rates spiking over the last month due to increasing bond yields, now may be the perfect time to consider taking an adjustable-rate mortgage (ARM).
The below chart illustrates the historical advantage of choosing variable/ARM pricing over fixed. With minor exceptions in late 2019/early 2020, you can see how clients that had chosen the variable-rate pricing beat the five-year fixed option time and time again. Since our current COVID-influenced economic environment is one not seen before the choice of the variable rate will be greatly impacted by GDP recovery and how quickly the Federal Government chooses to increase the prime lending rate.
Not all Variable Mortgages are created Equal
After analyzing the chart you now may be considering going for a variable mortgage. However, don’t forget that there are two different types to choose from– Adjustable Rate and True Variable Mortgages.
An Adjustable Rate Mortgage is where the clients’ payments will “adjust” with changes in the lender’s Prime Rate. It ensures that the client is still on track to maintain their original amortization schedule of the mortgage (minus any applied prepayments).
On the other hand, a True Variable Rate Mortgage is where payments remain fixed throughout the term, even if the Prime rate fluctuates. It means that if the prime rate INCREASES, then more of the amount will go towards interest costs instead of the principal balance, thus increasing the length of your amortization period.
Current Information on Adjustable Rate Mortgages:
The existing five-year insured ARM is as low as P-1.21%. (For Insiders Only!)
-It compounds semi-annually (NOT monthly!)
-It’s either Insured, Insurable, and Uninsured – not available for Rentals or BFS programs, and must qualify on BOC Benchmark.
Conversion: The client may convert their ARM mortgage into a five-year fixed term at current posted RFA rates anytime after the first payment gets made.
Also, The 20/20 prepayment option is an excellent way to decrease the principal balance further.
On a final note, remember that your choice of mortgage can significantly impact your future wealth. Therefore, having a trusted mortgage broker in your corner will help evaluate your current situation and show you comparisons of the fixed, variable, and adjustable-rate options.
I’m a licensed mortgage broker and experienced agent-based in Calgary, Alberta, who empowers home seekers to fulfill their dream of homeownership and live a life of abundance. Therefore, my mortgage solutions are part of creating your financial life by design, to grow wealth and provide peace of mind for clients.
I serve clients throughout Alberta and coast to coast across Canada, from B.C. to Quebec and the Maritimes.